A new sweep of three big banks and six traders for allegedly manipulating metals futures relied heavily on electronic chatter to build a case.

The Commodity Futures Trading Commission announced criminal and civil enforcement actions on Monday against Deutsche Bank AG and Deutsche Bank Securities Inc, UBS AG and HSBC Securities (USA) Inc. and six individuals involved in spoofing and stop loss collusion schemes. The criminal and civil enforcement actions were filed in conjunction with the Department of Justice and Federal Bureau of Investigation’s Criminal Investigative Division.

Deutsche Bank AG and Deutsche Bank Securities Inc. were hit the hardest, agreeing to pay a $30 million penalty while neither admitting or denying they failed to supervise precious metals traders who allegedly schemed to manipulate the price of precious metals futures contracts and allegedly colluding to trigger customer stop-loss orders. The fraud allegedly ran from Feb. 2008 to at least Sept. 2014.

Spoofing is when traders place large bids or offers in the futures market with the intent to cancel before execution after another smaller bid or offer is placed on the opposite side of the same market. The purpose of the scheme is to create the false appearance of market depth, which in turn creates the impression of greater buying or selling interest than legitimately exists.

As in past enforcement orders regarding traders schemes, the CFTC along with the U.S. Attorney’s office and the FBI relied on the mandatory recordings of trader chatter to prove the brazen nature of the schemes.

One trader was recorded responding to another trader’s discussion of a bid with, “For anyone. Or a spoof?” to which the other trader admits, “spoof.”

In another conversation, one trader admitted in another in a chat that he used spoofing to manipulate the market: “so glad I could help...got that up 2 bucks...that does show u how easy it is to manipulate it so[me]times.” Trader A commented further: “that was alot of clicking...i know how to ‘game’ this stuff.”

Trader A then added: “i f..k the m[ar]k[e]t around a lot...not alot of people...had it figgied out...thats [sic] why i love electronic trading.”

In another example, one of the same traders identified earlier asked another trader, “can I give you 1k plat[inum] pls ... and 5 k gold.” That trader wrote: “yep,” then asked: “i am selling both ... right?” to which Trader F responded: “yep ... spoofing it up ... ahem ahem.”

In another chat, a trader discussed precious metals trading with another trader, telling that trader: “i skewed the quote to the left ... people scared ... we[’]ll spoof it ahahaha.”

One UBS trader, for example, while discussing trading activity a trader at another bank, wrote: “hahaah”, and the other trader responded: “u [mu]st have [a]bout gazillions ... and u spoof the sell.” The UBS trader wrote: “we good ain[’]t we”, to which the other trader replied: “not very friendly.”

The UBS trader response? “we never are ... u want a fr[ien]d ... get a dog ... ahahahah.”

The CFTC said in its complaint that Deutsche Bank did maintain systems and policies designed to detect and deter spoofing but had “failed to perform its supervisory duties diligently.” Deutsche Bank put in place an electronic surveillance system to monitor trading patterns in order to detect potential spoofing in precious metals futures contracts by its traders, and the system did detect several hundred instances of potential spoofing by its traders, including several of the ones cited in the complaint. However, the regulator said it did not follow up on the majority of potential instances of misconduct identified by its electronic surveillance system.

Justin Slaughter, the former chief policy adviser and special counsel to CFTC Commissioner Sharon Y. Bowen, told MarketWatch, “The substance of the cases themselves is interesting. But what’s really interesting is that the CFTC states it substantially reduced the fines for the three banks because they cooperated. HSBC, in particular, seems to have been fined the equivalent of a parking ticket for a major financial institution that let one of its employee to engage in a multi-year spoofing scheme.”

“It seems clear,” said Slaughter, “that the CFTC’s nascent program of trading cooperation with enforcement inquiries for substantially reduced fines will apply to all financial industry actors, up to and including large banks.”

Francine
McKenna

Francine McKenna is a MarketWatch reporter based in Washington, covering financial regulation and legislation from a transparency perspective. She has written about accounting, audit, fraud and corporate governance for publications including Forbes, the Financial Times, Accountancy and the American Banker. McKenna had 30 years of experience at banks and professional-services firms, including at PwC and KPMG, before becoming a full-time writer.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.